The US tax system is progressive, meaning that the wealthiest citizens pay a higher percentage of their income than the less fortunate. But a new ProPublica analysis of the tax records of some of the nation’s richest Americans concludes that the 25 richest people in the US have a “true tax rate” of near zero.
The study, released Tuesday, relies on a “vast treasure trove” of IRS data provided to the intelligence service without “conditions or conclusions”. ProPublica said it will not disclose the source of the data, adding that it has verified the information by comparing it to publicly available details such as court documents and financial disclosures, as well as verifying information with the individuals whose tax information was disclosed.
The results come at a crucial time in the national discourse on wealth and the equity of the US tax system. Prior to the pandemic, the Tax Cuts and Jobs Act of 2017 lowered tax rates for rich and corporate, creating a dynamic that effectively shaped the country’s already growing income inequality. Given the oversized impact of the pandemic on low-income families – especially blacks and women – President Biden is calling for higher taxes on the rich to sustain the wealth of poor and middle-class families.
The ProPublica report focuses on what is known as the “true tax rate,” which is defined as the amount of taxes paid annually by the wealthiest Americans compared to the estimated growth in their wealth during that time. For example, Amazon CEO Jeff Bezos paid $ 1.4 billion in personal federal taxes on $ 6.5 billion in income between 2006 and 2018, while his wealth grew by $ 127 billion over the same period. According to ProPublica’s calculation, this corresponds to a true tax rate of 1.1%.
However, some tax experts found that the analysis compares what they think are apples to oranges: income versus wealth. The IRS levies taxes on earned income and income from stock sales, dividends, and other income from investments – it does not levy taxes on unrealized gains or the paper value of an individual’s assets.
“It’s a little unfair to calculate the element of fairness based on total net worth,” Jackson Hewitt’s chief tax information officer, Mark Steber, told CBS MoneyWatch. “They didn’t say they paid unfair taxes based on income – they said it was based on their worth.”
He added, “How about the business owner or farmer who doesn’t have much income but has increasing net worth – are they not paying enough because the value of their farmland has increased? It’s a slippery slope. “
Under Mr. Biden’s plan, the top tax rate for those with taxable income of $ 400,000 or more would rise to 39.6%, which is an estimated less than 2% of US households. The highest tax rate that workers pay on salaries and wages is 37%. The president also proposes nearly doubling the tax rate that high-income Americans pay on profits from the sale of stocks and other investments. In addition, according to his proposals, inherited capital gains would no longer be tax-free.
“Biggest tax history of the year”
IRS Commissioner Charles Rettig said the IRS is investigating the data breach on ProPublica.
“I can confirm that there is an investigation into the allegations that the source of the information in this article came from the Internal Revenue Service,” Rettig said at the beginning of a Senate Finance Committee hearing on the IRS budget. “In reviewing the article, appropriate contacts were made that would be expected and investigators will investigate.”
And as long as wealth is not “realized”, taxation is avoided – a perfectly legal strategy. For example, Amazon CEO Jeff Bezos’ net worth rose 57% year over year to $ 177 billion in April 2021, thanks to the appreciation of his stake in his company. But if he does not sell this Amazon share and thereby “realizes” his profits, no taxes will be due on this jump in wealth.
“Looks like the biggest tax history of the year, if not the decade,” wrote University of California Berkeley economist Gabriel Zucman on Twitter about the ProPublica results. “It has always been clear from public data that the top billionaires don’t pay a lot of taxes … but even I am surprised at how low their effective tax rate is.”
Zucman, the economist behind Massachusetts Senator Elizabeth Warren’s wealth tax proposal, is best known for an analysis of the U.S. tax system that found the 400 richest Americans pay an overall tax rate of about 23% – or less than the bottom half of the US US households. who pay a rate of around 24%.
“The punch line is that the US tax system is heavily regressive at the top end,” he added of the ProPublica report. “Which might not be the best.”
How the rich are different: loopholes
Behind these discussions are questions about the fairness of the US tax system. Most workers or employees do not have access to the types of loopholes and tax avoidance techniques that, for example, the richest people in the country use to lower their tax rates.
The richest Americans have a variety of tax avoidance techniques at their disposal, according to the ProPublica report. While these techniques are legal, the report raises questions about their fairness.
In 2011, Bezos reported that he lost money because his investment losses were greater than his income. That year, the 2011 Child Tax Credit – designed to help middle-class families offset childcare costs – provided $ 1,000 for each child as long as a married couple’s adjusted gross income was below $ 110,000. Bezos’ adjusted income was so low in 2011 that he claimed and received a tax credit of $ 4,000 for his four children. Bezos’ fortune was worth $ 18 billion that year.
According to the report, Bezos isn’t the only one with an extremely low true tax rate. The wealth of the 25 richest people in the United States grew by $ 401 billion from 2014 to 2018, but they paid $ 13.6 billion in federal income taxes. That corresponds to a true tax rate of 3.4%, said ProPublica.
The middle class, by comparison, pays a much higher actual tax rate because they have less wealth accumulation, argued ProPublica. Nor do they have the same opportunity as the rich to lower their taxes through techniques such as investment losses or write-offs.
But tax avoidance – using legal strategies to reduce your tax burden – is everyone’s right, say tax experts.
“We believe that every taxpayer should strive to pay the lowest tax bill they can by using the tax law as it exists,” said Steber of Jackson Hewitt. “I’ve found that it’s not just your right, it’s a well-known American tradition to do what is best for yourself and your family.”
Sarah Ewall-Wice and The Associated Press contributed to this report.